Florida Supreme Court Confirms Zero-Tolerance For Misleading UCC Filings

By Jeffrey N. Schatzman, Esq.

Schatzman & Schatzman, P.A.

Miami, Florida

 

            On September 29, 2022, the Eleventh Circuit Court of Appeals issued its opinion in 1944 Beach Boulevard, LLC v. Live Oak Banking Co. (In re NRP Lease Holdings, LLC), No. 21-11742, at *9 (11th Cir. Sep. 29, 2022), which reversed the Florida Middle District and Middle District Bankruptcy Courts’ decisions concerning perfection of a UCC-1 financing statement under Florida law.  The case involves 1944 Beach Boulevard, LLC’s, a chapter 11 debtor (“Beach Boulevard”) action to avoid Live Oak Banking Co.’s (“Live Oak”) blanket lien on its assets. 

            Live Oak had made two $2.5 million loans to Beach Boulevard and attempted to perfect its liens on all of Beach Boulevard’s assets by filing a UCC-1 financing statements for each loan with the Florida Secured Transactions Registry.  However, in its filings, Live Oak incorrectly named the debtor as 1944 Beach Blvd, LLC as opposed to its legal name, 1944 Beach Boulevard, LLC.  In its avoidance action, Beach Boulevard asserted that Live Oak’s financing statements failed to correctly name the debtor, making them “seriously misleading” within the meaning of § 679.5061(2), Florida Statutes and thus rendering Live Oak’s security interest unperfected.  The parties filed cross motions for summary judgment.

            Florida Statutes § 679.5061 addresses the effects of errors in financing statements and provides:

(1) A financing statement substantially complying with the requirements of this part is effective, even if it has minor errors or omissions, unless the errors or omissions make the financing statement seriously misleading.

(2) Except as otherwise provided in subsection (3), a financing statement that fails sufficiently to provide the name of the debtor in accordance with s. 679.5031(1) is seriously misleading.

(3) If a search of the records of the filing office under the debtor’s correct name, using the filing office’s standard search logic, if any, would disclose a financing statement that fails sufficiently to provide the name of the debtor in accordance with s. 679.5031(1), the name provided does not make the financing statement seriously misleading.

§ 679.5061, Fla. Stat.

            The Bankruptcy Court ruled in favor of Live Oak by finding that although Live Oak’s UCC filings did not correctly identify the debtor, the safe harbor provision of § 679.5061(3) was applicable since a search of the Florida Secured Transaction Registry discloses the financing statements containing the wrongly named debtor on the page immediately preceding the initial page that appears when searching by the proper name of the debtor.  The Bankruptcy Court believed that such a search result was consistent with standard search logic and thus the filings were not “seriously misleading”.  The Florida Middle District Court, sitting as an appellate court, followed the Bankruptcy Court’s logic and affirmed.

Beach Boulevard appealed to the Eleventh Circuit where the court certified three questions to the Florida Supreme Court:

(1) Is the “search of the records of the filing office under the debtor’s correct name, using the filing office’s standard search logic,” as provided for by Florida Statute § 679.5061(3), limited to or otherwise satisfied by the initial page of twenty names displayed to the user of the Registry’s search function?

(2) If not, does that search consist of all names in the filing office’s database, which the user can browse to using the command tabs displayed on the initial page?

(3) If the search consists of all names in the filing office’s database, are there any limitations on a user’s obligation to review the names and, if so, what factors should courts consider when determining whether a user has satisfied those obligations?

1944 Beach Boulevard, LLC v. Live Oak Banking Co. (In re NRP Lease Holdings, LLC), 20 F.4th 746, 758 (11th Cir. 2021).

            In analyzing the questions presented, the Florida Supreme Court determined that the more appropriate question was: “Is the filing office’s use of a ‘standard search logic’ necessary to trigger the safe harbor protection of section 679.5061(3)?”, which they answered in the affirmative.[1]  In coming to that conclusion, the Court found that under subsection 1, a financing statement can overcome errors if the errors do not make the financing statement seriously misleading. However, under subsection 2, the Court states that it is seriously misleading and there is a zero-tolerance where the name of the debtor is not correctly stated as required by § 679.5031(1)[2]. 
The Safe Harbor of subsection 3 is only applicable if the Registry employs “standard search logic”.

            In deciding the matter, the Florida Supreme Court analyzed and adopted the UCC’s definition of standard search logic and concluded that Florida’s UCC registry does not employ standard search logic.  Whereas a search using standard search logic will generate a finite list of names, Florida’s UCC registry searches return 20 names on a page starting with the most relevant name.  The results are located in a section of the entire list of filings and a user would have to toggle forward and backwards to find additional results.  The Court agreed with the analysis of Professor Kenneth C. Kettering, that a “search procedure that returns as hits, for any search string, all financing statements in the filing office’s database cannot rationally be treated as a ‘standard search logic.’” [3]

            Since the Florida Secured Transaction Registry does not apply standard search logic, making the Safe Harbor inapplicable, the Court did not reach the questions certified by the 11^th Circuit and held that as long as the Registry does not employ standard search logic, any error in stating the debtor’s name will cause a financing statement to be seriously misleading and render the secured interest unperfected.

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[1] 1944 Beach Boulevard, LLC v. Live Oak Banking Co., No. SC21-1717, 2022 WL 3650803, at *1 (Fla. Aug. 25, 2022).

[2] (1) A financing statement sufficiently provides the name of the debtor:

(a) Except as otherwise provided in paragraph (c), if the debtor is a registered organization or the collateral is held in a trust that is a registered organization, only if the financing statement provides the name that is stated to be the registered organization’s name on the public organic record most recently filed with or issued or enacted by the registered organization’s jurisdiction of organization that purports to state, amend, or restate the registered organization’s name.

[3] Id. at *12, citing to Kenneth C. Kettering, Standard Search Logic under Article 9 and the Florida Debacle, 66 U. Miami L. Rev. 907, 913 (2012).

Evaluating Fraudulent Transfer Liability for Pass-Through Tax Distributions – Start with the F-Squared Opinion

By Peter J. Klock, II
Partner, BAST AMRON LLP
Miami, Florida 

               

Generally speaking, when a corporation pays dividends or distributions to its shareholders, the law does not consider the corporation to have received “reasonably equivalent value” in exchange for the payments.  For a solvent corporation authorizing and paying dividends in the ordinary course of business, the lack of reasonably equivalent consideration received in exchange for the dividends is a non-issue.  But where a corporation is insolvent, the dividends paid leave it with unreasonably small capital, or it is unable to pay its debts as they mature, dividends paid to shareholders are susceptible to being clawed back via, among other things, claims for the avoidance of constructively fraudulent transfers under applicable state or federal law.

            While resolution of such claims typically hinges on the solvency or insolvency of the corporation at the time of the transfers at issue, under narrow circumstances, defendants may be able to defeat efforts to claw back distributions made for the purposes of paying pass-through taxes.  In her recent opinion in the matter of In re: F-Squared Investment Management, LLC, 633 B.R. 663 (Bankr. D. Del. 2021), Bankruptcy Judge Silverstein thoughtfully analyzed several cases dealing with claims to claw back tax distributions and explained the reasoning succinctly, stating, “a transfer is not fraudulent if creditors are ‘no worse off’ as a result of the challenged transactions.”  

In the case before her, the debtor (a limited liability company) had made a number of pre-petition transfers to its members to pay their pass-through tax obligations.  After the debtor filed for chapter 11 protection, the trustee of the liquidating trust brought a dozen adversary proceedings seeking to avoid distributions to the members, including the tax distributions, as fraudulent transfers.  At the summary judgment stage, Judge Silverstein carved out and granted summary judgment in favor of the defendants on the claims to recover the tax distributions, finding that they had been made for reasonably equivalent value.  Critical to her determination was the fact that the debtor had previously converted from a C-Corp to an LLC, and its shareholders were induced to approve the conversion by a promise that the converted LLC would make quarterly distributions sufficient to cover their pass-through tax obligations.  The operating agreement of the LLC also expressly stated that the members were entitled to receive tax distributions sufficient to cover their pass through obligations, and the tax distributions were actually in amounts commensurate with estimated pass-through taxes (i.e., for periods in which the debtor did not profit, it did not issue tax distributions).

Under these circumstances, the debtor was no worse off due to its payment of the tax distributions.  Had the transferees not approved the conversion, the debtor would have had to pay income tax on its revenue, and the debtor was therefore no worse off as a result of the conversion and payment of distributions (which the Court viewed as one cohesive transaction) to cover pass-through taxes.  For that reason, Judge Silverstein distinguished the case before her from a case which did not involve conversion from a C-Corp to an LLC or S-Corp premised upon the payment to members or shareholders of funds to pay pass-through tax liability.

Bankruptcy trustees, insolvency litigators, and corporate attorneys alike should take heed of the F-Squared opinion and the cases discussed therein.  For those prosecuting or defending claims for the avoidance of fraudulent transfers, the merits of the claim will likely turn on the factors identified by Judge Silverstein.  For those organizing or converting to pass-through entities, the members’ or shareholders’ potential liability for such claims will likely turn on the language of the operating agreement or by-laws.